Explaining Inflation

Explaining InflationBy Brendon, Prithvi, Kevin and Anudeep

What is inflation?Inflation is a sustained increase in the general price of goods and services in an economy over a period of time.How does this relate to the Business Cycle?Well Lets Find Out!!!

In a particular town there lived eight people. Four were employed while the other four were unemployed. 5

Also in this town there was a coffee shop.

This coffee shop produces four cups of coffee every day, each at the cost of $2.

This mean that the four of the people that are working are able to purchase the coffee.

Right now the economy of the country this town is located in, is in recession which is why employment is so low.

But soon the economy begins to expand and one of the unemployed people becomes employed.

This leads to a problem for the coffee shop as the newly employed man also wants coffee.

But the coffee shop is currently only producing four coffees.

This mean that one man will be unable to purchase coffee due to supply being lower than demand.

To combat this problem the coffee shop has two options.

They can either increase production or increase price to lower demand.

They decide to increase production to 5 coffees.

This allows all five people to purchase coffee

Now the economy reaches peak and 2 more people receive a job.

This leads to a problem as now seven people want coffee while the shop produces only five.

So to deal with this the coffee shop increase prices from $2 to $3.50 in order to lower demand.

One person leaves due to them being unable to afford coffee anymore.

But there are still six people wanting coffee even though the coffee shop can only produce five coffees.

But now the economy starts contracting and one person loses there job.

Now 5 people can buy the five coffee

But now the economy reaches recession and someone else loses there job.

So now in order to increase demand they decrease prices to $2.50.

Now as prices are lower a customer comes back.

So now if we look back at the last recession and compare it to this one we can see that the price increased by $.50.

THIS IS INFLATION!!!!!!!!!!!!!!

This phenomenon can be explained by the Philips curve which shows that when unemployment is high inflation is low while when inflation is low unemployment is highTHE ENDMitiS - Touch (Original Mix)244260.92